FIN 350: Managerial Finance
Assignment #3
Please show all work or inputs, and carry all dollar amount out to the nearest penny, and all interest rates out to the nearest 1/100th of a percent.
1. If you save $150 per month for the next ten years, $225 per month for the following 10 ten years, and $350 per month for the following ten years, how much will you have 30 years from now assuming that the account earns 8% for the first ten years, 10% for the next ten years, and 6% per year for the final 10 years. Assume beginning of month payments. (7 pts.)
2. If an insurance company offers you annuity payments of $40,000 per year for the first 10 years of retirement and $50,000 per year for the next 10 years, what would you be willing to pay for this annuity if you have a required rate of return of 7.6%? Assume beginning of year payments. (3 points)
3. You just bought a car and borrowed $22,000 from the bank to help with the purchase. Your monthly payments will be $415 for five years. What is the annual rate of interest you are paying on this loan and what will be the remaining principal immediately after the first payment is made? ( 4 pts.)
4. You have decided to start saving for your daughter’s wedding, which you estimate will cost about $20,000. You will start making $300 monthly payments exactly one month from today into an account earning a 4% annual rate of return. How long (to the nearest month) will it take you to have the money for the wedding? (2 pts)
5. Explain why the future value of an annuity due is greater than the future value of an ordinary annuity (all else being equal), and why the present value of an annuity due is always higher than the present value of an ordinary annuity (again, all else being equal). (2 pts.)
6. Explain the relationship between interest rates and present values. Why is this? (2 pts.)
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